Use the preceding-year evidence for the applicable company class
Section 138 of the Companies Act, 2013 and Rule 13 of the Companies (Accounts) Rules, 2014 govern the stated internal-auditor requirement. Checked on 28 October 2026, this working focuses on ordinary companies screening FY 2026–27 using preceding FY 2025–26 evidence. Listed companies are covered by Rule 13(1)(a); unlisted public and private companies have different financial tests. Establish listed status under the Act and applicable definition rules rather than assuming that any traded security settles that classification. Specified IFSC companies have the section 138 adaptations shown in the official ICSI text and require separate review. ICSI official Companies Act e-book: Companies (Accounts) Rules, Rule 13.
Build the unlisted-public-company test separately
Rule 13(1)(b) lists alternative criteria: paid-up share capital ₹50 crore or more during the preceding financial year; turnover ₹200 crore or more during that year; the stated bank/public-financial-institution borrowing criterion around ₹100 crore at any time during that year; or outstanding deposits ₹25 crore or more at any time during that year. A company need not fail every test before an applicable trigger matters. Do not substitute net worth for paid-up share capital, cash receipts for statutory turnover, or the current year's budget for preceding-year actuals. ICSI official Companies Act e-book: Companies (Accounts) Rules, Rule 13.
Keep the private-company test narrower
Rule 13(1)(c) uses turnover ₹200 crore or more during the preceding financial year or the stated bank/PFI borrowing criterion at any time during that year. It does not list paid-up capital or deposits as independent private-company triggers. These omissions do not decide whether another law, regulator, contract or governance decision requires an audit. Record the limited conclusion: whether these particular Rule 13 criteria are met, for this company and period. A voluntary internal-audit arrangement can also exist outside the mandatory population. ICSI official Companies Act e-book: Companies (Accounts) Rules, Rule 13.
Reconstruct qualifying outstanding balances rather than sanctioned limits
For borrowing, identify the lender's legal classification and the company's actual outstanding amounts across qualifying banks and public financial institutions. A sanctioned but undrawn limit is different from an outstanding borrowing. Do not automatically include every intercorporate or director loan as a bank/PFI borrowing. Reconcile simultaneous balances across qualifying lenders: taking each lender's individual peak on unrelated dates can produce a fictitious combined peak. Conversely, a low 31 March balance can conceal a high outstanding balance earlier in the year. Keep daily or event-based data adequate to prove the actual maximum. ICSI official Companies Act e-book: Companies (Accounts) Rules, Rule 13.
Handle the borrowing boundary candidly
The published Rule 13 text uses the phrase 'exceeding one hundred crore rupees or more'. Preserve the exact text in the applicability memorandum and resolve an exactly-₹100-crore fact pattern with a supported legal conclusion; the illustrations deliberately use amounts clearly below or above that wording. They do not silently equate an undrawn sanction with a threshold crossing or present the awkward wording as an unqualified mathematical greater-than-or-equal rule. The turnover, capital and deposit equal-to cases below use the rule's clearer 'or more' wording. ICSI official Companies Act e-book: Companies (Accounts) Rules, Rule 13.
Appointment must lead to a defined audit programme
Section 138 permits the specified chartered accountant, cost accountant or other professional decided by the Board; Rule 13 permits the stated individual, partnership-firm or body-corporate form. The internal auditor may or may not be an employee, and the rule's explanation covers the stated CA/CMA practice status. Rule 13(2) requires the Audit Committee or Board, in consultation with the internal auditor, to formulate scope, functioning, periodicity and methodology. Its commencement-era six-month proviso is not a fresh automatic six-month grace period every time a company crosses a financial test. Retain appointment and programme evidence alongside the applicability calculation. ICSI official Companies Act e-book: Companies (Accounts) Rules, Rule 13.
Applicable primary references
ICSI official Companies Act e-book: Companies (Accounts) Rules, Rule 13 ICSI official Companies Act e-book: section 138 and specified IFSC adaptations
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Private-company turnover at the threshold
Assume a private company's statutory FY 2025–26 turnover is ₹200 crore and all other facts are ordinary. The '₹200 crore or more' turnover test is met. ₹199.99 crore would be ₹0.01 crore, or ₹1 lakh, below that turnover threshold; a separate borrowing trigger must still be checked.
Illustrative example 2: Unlisted public capital is its own alternative
Assume an unlisted public company's paid-up share capital during the preceding year reaches ₹50 crore, with turnover ₹100 crore and qualifying borrowings ₹20 crore. The capital test is met independently. Waiting for turnover to reach ₹200 crore would miss that alternative trigger by confusing separate tests.
Illustrative example 3: A year-end balance can hide the peak
Assume a private company has simultaneous qualifying bank/PFI outstandings of ₹60 crore and ₹42 crore on a documented date in the preceding year, but only ₹70 crore in total at year-end. The actual combined ₹102 crore is above ₹100 crore by ₹2 crore. The ₹32 crore fall before year-end does not erase the earlier event.
Illustrative example 4: Unrelated lender peaks must not be added
Assume qualifying lender A peaks at ₹60 crore when lender B is ₹20 crore; lender B later peaks at ₹50 crore when A is ₹30 crore. Assume the complete event record confirms no other higher combined balance. Actual combined maximum is ₹80 crore, not the ₹110 crore sum of unrelated individual peaks. This model borrowing test is not triggered by the invented ₹110 crore figure.
Illustrative example 5: Public-company deposits at equality
Assume an unlisted public company's preceding-year outstanding deposits reach ₹25 crore, with ₹49 crore paid-up capital, ₹150 crore turnover and ₹80 crore qualifying borrowings. The deposit test is met at equality. It stands ₹1 crore above an alternative hypothetical ₹24 crore deposit peak that would not meet this particular criterion.
Illustrative example 6: Private capital and non-qualifying loans do not create listed triggers
Assume a private company has capital ₹70 crore, turnover ₹150 crore, qualifying bank/PFI borrowings peaking at ₹80 crore and ordinary non-PFI intercorporate loans ₹40 crore. The listed private-company financial criteria are not met on these stipulated facts. Adding the non-qualifying ₹40 crore to claim a ₹120 crore bank/PFI peak would misclassify the lender population; other obligations remain a separate review.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm the relevant financial year | FY 2026–27 screening and preceding FY 2025–26 records |
| 2 | Establish company and listed classification | Act definition, securities and applicable exceptions |
| 3 | Review any special adaptation | Specified IFSC or other applicable notification |
| 4 | Extract the correct capital metric | Paid-up share capital and changes during the preceding year |
| 5 | Reconcile turnover | Statutory turnover and signed financial records |
| 6 | Classify each borrowing source | Banks/PFIs versus other lenders and sanctioned versus drawn amounts |
| 7 | Build actual combined outstanding peaks | Simultaneous dated balances and full event coverage |
| 8 | Reconcile public-company deposits | Qualifying population and actual preceding-year peak |
| 9 | Record the legal applicability conclusion | Each alternative test and any exact-boundary judgment |
| 10 | Complete the appointment and audit programme | Board/Audit Committee evidence, scope, periodicity and methodology |
Sixteen practitioner FAQs
1. Which year supplies these financial metrics?
The preceding financial year specified in Rule 13.
2. Are listed and private-company tests identical?
No. First establish the company's legal class.
3. Does every security listing conclusively establish listed-company status here?
Check the Act definition and applicable exclusions.
4. Is net worth the same as the capital test?
No. The rule specifies paid-up share capital.
5. Can an unlisted public company trigger on capital alone?
Yes, where the stated criterion is met.
6. Does the turnover test include equality at ₹200 crore?
Its wording is ₹200 crore or more.
7. Does private-company capital ₹50 crore independently trigger Rule 13(1)(c)?
That sub-rule does not list capital as an independent criterion.
8. Does the private-company sub-rule independently list deposits?
No. Keep its two stated financial routes separate.
9. Are undrawn sanctioned limits outstanding borrowings?
They are different facts; establish actual outstanding amounts.
10. Can every intercorporate loan be counted as bank/PFI borrowing?
No. Verify the lender's qualifying classification.
11. Is the 31 March borrowing figure sufficient?
It can miss an earlier qualifying peak.
12. Can separate lender peaks on different dates be summed?
That can invent a combined peak; reconcile simultaneous balances.
13. How should exactly ₹100 crore be addressed?
Preserve the actual borrowing wording and obtain a supported boundary conclusion.
14. Must the internal auditor always be an outside employee-free firm?
The rule permits the stated forms and says the auditor may or may not be an employee.
15. Is the old six-month commencement proviso an annual grace period?
It should not be treated as a newly recurring grace period.
16. What follows appointment?
The Audit Committee or Board, consulting the auditor, formulates the Rule 13(2) audit programme.
Conclusion
Screen the correct company class against preceding-year capital, turnover, bank/PFI borrowing and deposit criteria before deciding whether an internal auditor must be appointed.